THE FUTURE OF ONLINE REAL ESTATE SALES

By Russ Klein
December 14, 1999

The Internet has resulted in some degree of disintermediation, a process whereby participants are removed from a value chain, in industries ranging from books to software. However, in many other fields, the Web has simply allowed new intermediaries to supplant traditional parties to transactions. This trend is just beginning to take hold in the real estate industry, where established realtors are facing significant challenges from new web-based realty intermediaries such as Microsoft Home Advisor.

Before examining the potential long-term impact of e-commerce on the real estate industry, it is important to note some of the key characteristics of the industry prior to the emergence of the web. Real estate agents helped clients through a series of often bewildering steps such as listing properties, negotiating contracts, and obtaining financing. Relationships played a critical role in the industry, given the importance of a firm or agent’s reputation and track record in influencing customer selection of realtors. The industry was highly fragmented, with often hundreds of firms located in each major U.S. city. However, virtually all firms were members of the National Association of Realtors (NAR). NAR members dominated the industry because they had virtually exclusive access to the prices of real estate sold and could use the association’s tremendous lobbying clout to their advantage. Furthermore, the NAR was instrumental in keeping real estate agent fees (commissions) fixed within a narrow range, thereby limiting competition strictly on the basis of price. Legitimization of this system was, in part, assisted by states that required all agents to pass state licensing exams.

It is reasonable to assume that the Web may eliminate the need for traditional real estate agents within the next decade. However, I believe new web-based intermediaries will be required due to the tremendous complexity of buying and selling property. I predict traditional small agencies, larger established firms such as Century One, and new online entrants such as Microsoft will all generate substantial business online. However, the firms that provide the most online property listings will likely come to dominate due to the network externalities associated with higher volumes of transactions. Buyers and sellers will not only gravitate towards sites with the most listings and price comparison data but also to sites with the most innovative technologies for showcasing property (e.g. 3-D tours) and completing transactions. During the next few years, the intermediaries will still need to complete some portions of the buying and selling process offline. However, as technology improves and e-commerce becomes commonplace, I believe that greater portions of the entire transactions will be conducted online.

The potential impact of e-commerce on the real estate industry can be summarized in terms of structuration theory. To begin, relationships will continue to play a critical role in influencing client choice, particularly because clients may not be able to actually visit a property before purchasing it online. In fact, services will likely emerge that would enable previous customers (i.e. "community") to rate the quality of online real estate services. Sites that quickly compile very large listings of available properties either through internal development or acquisitions will have significant first-mover transactional advantages because they will be able to attract larger numbers of buyers and sellers and therefore generate greater transaction volumes. Greater transparency of information online from listings of recent comparable transactions or even online real estate auctions will diminish the ability of the NAR to dominate the industry and will thus allow greater price competition among agents. Virtual agents will be able to offer far more content to clients than ever before and will be able to expand their geographic scope worldwide. Legitimation (licensing) will still be overseen by states. Finally, improvements in e-commerce technology will break down communication and informational barriers.